OREANDA-NEWS. April 28, 2009. Global light vehicle output now stands at 54.9 million units — the lowest year since 2001 according to a paper by PricewaterhouseCoopers. In 2001 the BRIC countries accounted for only 5.1 million units (9% of the total), whereas this year, they represent 13.8 million (25%), reported the press-centre of PricewaterhouseCoopers. 

In established production centres, the downturn is expected to be L-shaped in nature — i.e. a deep fall and a long road to recovering prior volumes. This is indicative of an expectation that consumers will fundamentally reevaluate the level of debt they are willing to assume; the elongation of replacement cycles for vehicles, and a possible reduction in the number of cars owned per household (particularly in the US). The 54.6 million unit forecast is predicated on the basis of an improved second half of the year performance – against a Q1 running rate estimated at 45 million.

US light vehicle SAAR continued to trend downward in Q1 with a slight uptick in March — if sales rates continue to stabilise, the market may avoid breaching the 9 million low watermark that Chrysler, in its submission to Congress, said would render the industry no longer viable ‘as currently structured’. The 10.1 million US sales forecast for 2009 translates into North American light vehicle output of 8.7 million, which is the lowest level of output since 1982.

In vehicle assembly, the region is dominated by Russia, Turkey, and Ukraine, which account for some 90% of the region’s output. When compared with 2008, we believe that the three countries will post sales some 1.3 million units lower in 2009.

As with many other markets, all was relatively calm for Japan and Korea until Q4 2008 when the global crisis washed ashore, impacting export volumes and domestic sales. Year-on-year Japanese exports declined by 20% in Q4 2008 and the decline has worsened in 2009, with February’s exports down a staggering 70%.

In 2008, China’s light vehicle sales growth slowed to 6.5% — a boom anywhere else — but China’s lowest rate in 10 years. In India, light vehicle sales grew 4.4% in 2008 as Q4 undid all the progress from the first half of the year.

With Brazil accounting for 75% of South America’s light vehicle output in 2009, where Brazil goes South America follows.

In Russia sales of new cars in the 1st quarter fell by approximately 40% compared to the same period of last year. PwC specialists note several key factors that have produced the greatest effect on the market in the first months of 2009, these are devaluation of the Russian rouble, tightened bank lending policies and low levels of consumer confidence caused by news of significant lay-offs and wage cuts.

However, the rate of reduction of total sales (including second hand vehicles) has been increasing, e.g. January — 36%, February — 42%, March — 52%. Sales of second-hand foreign-made cars imported to Russia appear to have considerably decreased. Overall shares of new Russian and foreign brands were relatively stable over the first quarter.

One consequence of the above market situation is that production volumes have declined even more sharply. Based on data from January and February, Russia’s car production fell by nearly 70% in comparison with the same period of the previous year. In February, many car factories worked a shorter week, and some of had to suspend operations altogether.

Stanley Root, partner and automotive leader of PricewaterhouseCoopers, comments:
“The global financial crisis and its impact on the Russian car market has been sudden and brutal, with demand shrinking unexpectedly from August 2008. All market players have had to urgently revisit their plans. Now companies reducing production and slowing sales in order to run down existing stocks at their dealers. When production resumes again it will be to match new, lower levels of demand. But at present it is still very difficult to see what those new lower levels will turn out to be.”

Various scrappage schemes in the EU have a big impact on the 2009 outlook and thus introduce more uncertainty into the market given how the incentives differ in scale and scope, have different implementation and end dates, and will pull forward demand to varying degrees.

The French government was one of the first to introduce new incentives in response to the crisis. The French package offers EUR 1,000 to consumers scrapping vehicles more than 10 years old in exchange for vehicles emitting less than 160 g/km CO2. The French scheme gained traction in March, as sales increased 8.1%. Germany has announced its own incentive scheme, offering EUR 2,500 to scrap cars over nine years old in exchange for Euro 4 cars.

The German government has earmarked a total EUR 1.5 billion for this programme, which could see up to 600,000 new cars sold (approximately 20% of the total market). The German scheme boosted sales in March by 40% for a 20% year-to-date increase. Interestingly registrations of German manufacturers' cars rose 9% to 172,700 vehicles, while those of foreign cars rose 48% to 105,100 (according to VDA). The Italian scheme boosted sales marginally in March — but an order book reportedly 30-40% higher augurs well for April and May.

Similar schemes have already been introduced in Portugal and Spain. Italy has announced its own version of the scheme in February 2009, and the Netherlands is considering something similar.

Stanley Root says:
“In Europe we have seen governments take a variety of measures to support this vital industry. The question is how can national governments do this without invoking a wave of protectionism. There is a strong — and natural — temptation for national governments to use taxpayers’ money to support taxpayers’ jobs: increase import duties, implement large-scale state orders for locally produced cars, and grant preferential loans to local manufacturers. However, since the automotive industry is one of the most globally integrated industries, then such a protectionist response, if replicated throughout the world, could make an already critical situation far worse, and longer lived.”

The Russian government has not yet announced its own version of the European incentives for consumers to scrap old cars and replace them with newer, cleaner and safer models.

Stanley Root adds:
“Such incentives could be particularly effective in Russia, given that the car fleet is significantly older than elsewhere in Europe, and that Russia’s road safety record lags behind that of its European counterparts partly because of the age and condition of its car parc. Moreover, such a scheme would have the added advantages of being relatively simple to implement, and most importantly having an immediate impact on consumer demand. Given the scale of the crisis, the Russian government may well consider further steps to support the industry, and it no doubt will be monitoring closely the results of the car scrapping schemes in Europe.”